Is Your Financial Partner in the Moving or Storage Business?

Abstract

THE JOURNAL OF STRUCTURED FINANCE 65 M any investment and commercial banks are focused on the warehousing of large pools of commoditized assets (i.e. credit cards, home equity, student and auto loans) with the sole purpose of providing an interim lending facility for the ultimate prize of generating fee income through periodic term securitizations. As an issuer, do you often get a call when times are good from some financial institution’s “Business Development Officer” offering lines of credit and a full suite of banking products? What about when times aren’t so robust? Does the phone still ring or have those same institutions run for the hills or simply lost interest? The solution to finance your business can be simplified by answering one question: Is your financial partner in the moving or storage business? What exactly does this “moving” versus “storage” question mean? Some financial institutions provide financing for assets only if they will be taken out via a term securitization, thus the “moving” business. Conversely, institutions which are interested in building assets are in the “storage” business. In the event that the term securitization market falters, what will happen to your credit facility and who will be there to provide financing? Financial institutions in the storage business look at lending for the long haul, sizing credit enhancement based upon the assumption that there is no take-out and the pool of assets must amortize completely. Firms in the moving business usually have post-review commercial paper programs, provide aggressive advance rates and generally do not adhere to the rating agency criteria for eligibility. Firms in the storage business normally maintain pre-review conduits, adhere to rating agency eligibility, and prescribe advance rates determined in conjunction with those same firms. Perhaps a higher advance rate and less stringent criteria for your warehouse program sounds like a good idea, but what happens to your credit facility when the term market isn’t so favorable? As an issuer, will you need to provide additional receivables to prop up a rated execution or possibly change the way your business is conducted? An even bigger question is will that lending institution continue to provide financing? The answer for many large financial institutions is that lending is cyclical, with the ability to execute in the capital markets driving lending decisions, as opposed to lending driving a company’s needs in the capital markets. What will happen when the first sign of distress hits? Your goal as a company with financial warehousing needs SPONSOR STATEMENT